LVR tweaks substantive for owner-occupiers

Investors will be able to buy additional houses with a 35% deposit instead of 40%.  For owner-occupiers, banks will be able to use 15% of their new lending for clients who have a deposit of more than 80%. The existing rule is 10% of new lending.

ANZ chief economist Sharon Zollner says the change for investors is not likely to make a huge difference, as it is difficult to make the maths work on a highly leveraged property investment given the change to interest deductibility rules, and that the tweak is small.

However, the difference for owner occupiers is more substantive because it’s not a fixed amount of lending; it’s a proportion of a total that can go up and down, and growth in mortgage borrowing and house sales may be close to bottoming. “That 15% could represent a higher percentage of a higher number,” Zollner says.

Similarly, while the number of borrowers is still lower than a year ago, the rate of decline is dropping, and could tick positive before long, she says.

“Overall, then, the tweak does have the potential to have an impact on the availability of mortgage credit to owner occupiers – particularly first home buyers, who typically need to borrow larger amounts – and therefore on the housing market.”

What are the impacts?

Zollner says it is difficult to quantify the potential impacts of the proposed change in LVR restrictions given the uncertainty around the outlook for the housing market.

“Given they are defined as a share of lending, they act as a magnifier to some extent – the additional amount of high-LVR lending will be greater if overall mortgage lending picks up, or possibly not much greater if mortgage lending stays low or falls further.”

She says, in addition, there are always many moving parts and isolating the impact of one development is difficult at best. “But suffice to say, we’ll be watching lending statistics with interest over coming months, to gauge how much unmet demand for high-LVR lending is out there, and what the consequences of unleashing it might be.

“The causality between house price inflation and LVR restrictions can go both ways – putting on restrictions can reduce credit availability, stifling the market, but the latest decision was an example of reverse causality: the RBNZ decided that the large fall already seen in house prices made further large falls less likely, reducing financial stability risks.”

Waxing and waning

High-LVR lending has waxed and waned over the near-decade that the LVR tool has been available.

“These are clearly not toothless tools. The most dramatic example of this is the surge in high-LVR lending and house prices that occurred following the 12-month suspension of the LVR restrictions when COVID hit, she says.

“Of course, the significant cut in interest rates was important too, but the removal of the LVR suspensions definitely played a part.”

Zollner says it’s important to note that raising the cap on high-LVR lending doesn’t necessarily mean that banks will lend up to the new limit.

“Banks make their own risk assessments at both the macro and customer level, and customer demand for large loans comes and goes depending on job security, expected wage growth, actual and expected interest rates, and expected capital gains.”

Currently, job security is generally still very good, though set to decline. Recent strong wage growth is likely to have boosted expectations of future increases, interest rates have soared, making servicing very large loans much more challenging, although a narrative is taking hold that interest rates have definitely peaked. Zollner is not so sure.

Overall, though, Zollner says it does appear the existing cap is binding – based on both adviser feedback and the data on the proportion of lending that is high-LVR – so it is reasonable to assume there will be a lift in high-LVR lending as a result.

Whether this is enough to result in house prices actually lifting remains to be seen. Headwinds for the housing market remain.

If the market nonetheless takes off, she says it will rapidly become a victim of its own success, with the RBNZ unlikely to tolerate such a development as long as inflation remains so far outside the target band.

Tinkering at the edges as credit growth weakens

Meanwhile Kiwibank chief economist Jarrod Kerr says the LVR changes are a bit of tinkering. “They are not big changes, but they’re clearly in response to weak credit growth.”

Kerr says the tweaks were made with the likely implementation of debt-to-income (DTI) restrictions coming next year.

He says the RBNZ has helped engineer a correction in the housing market following excessive moves. “And it’s forecasting [that] recession is upon us.”

Following an unexpected, and unnecessary, 25bp hike to 5.5% later this month, the RBNZ is likely to pause and assess, Kerr says. 

“We continue to think the next giant leap in central banking will be an unwind of heavy handed rate hikes. We believe central banks may be in a position to start cutting interest rates possibly this year, or early next year.”

New significant reports this week

Wednesday is the big data day this week, when the RBNZ is due to release the Financial Stability report.

The hefty document will provide an update on the health of the financial system. However, all the big bang announcements were made in the weeks leading up to Wednesday.

Not long after, the March quarter jobs report will be released. Kerr says by Kiwibank’s assessment, the labour market remains incredibly tight.

The bank’s economists expect to see the unemployment rate remain unchanged at 3.4%, near record lows.

“Despite emerging signs of domestic demand slowing, firms continue to show an appetite for labour,” says Kerr.

“But a migration-fuelled boost to labour supply is helping to resolve the staffing issues that have long-plagued firms in this Covid era.”